Insight: Australia's coal-seam gas industry feels political heat

GUNNEDAH, Australia Wed Nov 16, 2011 11:41am EST

1 of 5. Farmer Clive Duddy sits in front of an access gate to a neighbouring property, owned by coal seam gas miner Santos, during a blockade of the property by local landholders near Spring Ridge, 290 km (180 miles) north of Sydney November 2, 2011.

Credit: Reuters/Tim Wimborne

GUNNEDAH, Australia (Reuters) - - On a recent spring day in the small Australian farming town of Gunnedah, an unlikely protestor takes the microphone to open a rally against the rapidly growing coal-seam gas industry: national radio talk-show host Alan Jones.

Jones, who broadcasts out of Sydney, has come to this remote community to show solidarity with a few hundred locals carrying yellow triangular signs reading "Farms Not Gas" and "Coal Seam Gas Stinks," part of a growing revolt against an industry spreading rapidly across the Australian landscape.

"You own what's underground, the community owns what's under the ground ... I warn Eastern Star Gas and Santos and others: you are not the community!" Jones tells the cheering crowd, naming two of the coal-seam gas firms working in the region.

The crowd are an unusual band of protesters: many are grey-haired and some have children in tow while others have taken the day off from running farms or teaching school to join the rally.

Jones, standing before a large Australian flag, bellows into the microphone with his arms held high: "Government has got to say prime agricultural land will be quarantined from all of this. Not asking much! But that's what today's about."

Jones is known in Australia for hitching himself to contentious issues. He goes down well among conservative voters and has been a thorn in the side of Australia's left-leaning government over its carbon tax plan and immigration policy.

He is normally no friend of the greens lobby, so to find this conservative "shock jock" and environmentalists aligned against coal-seam gas is a clear sign the industry, after years of causing barely a ripple, is headed for the political rocks.

With a surge of popular support for measures ranging from more regulation to an outright ban on drilling, the industry faces the prospect of project delays, higher costs and even blockades that have already succeeded in delaying drilling.

"The risks are quite material because of the groundswell of public opinion. The coal-seam gas industry will still move forward, but it will take longer and there will be added costs," said Geoff Barker, a partner at Resource Investment Strategy Consultants.

"In a changing regulatory environment, it's difficult to know whether you can foresee all of the costs that are likely to come your way."

WATER FIGHT

Politicians of all stripes have joined up to slow its march, including Australia's richest man, mining magnate Clive Palmer, conservative opposition leader Tony Abbott and Australian Greens leader Bob Brown. Normally poles apart, the conservatives and greens are in rough alignment in public debate on an issue that touches pressure points right along the political spectrum.

The debate on coal-seam gas development is over water and land rights -- two fundamental issues in the world's driest inhabited continent where less than 7 percent of land is arable and water shortages pose a serious threat.

Gas is unlocked from coal beds or seams by drawing the water out of them. Sometimes, to dislodge pockets of gas, water is injected back into the seams at high pressure to fracture them, which is known as fracking. Both techniques worry farmers, who draw on groundwater for their livestock or crops.

Australians are not alone in opposing non-traditional gas sources such as coal seams. Similar concerns have led to bans on fracking in France and South Africa and at a provincial level in Australia's New South Wales state and a few U.S. states.

On average, gas wells in Queensland suck 20,000 liters of water a day from the coal seams, although the amount can vary widely and declines over time.

Nearly 600 km (370 miles) north of the Gunnedah rally, in the Darling Downs area of Queensland state, a swathe of rich farm and grazing land, the industry already has a firm foothold.

In just over a year, Santos, BG Group and Origin Energy have sunk $45 billion into three export projects in Queensland, and investment in the sector could reach $80 billion when the industry hits full stride.

The coal-seam gas projects underway will produce nearly 21 million tons of liquefied natural gas, double Australia's current production, and are part of a rapid increase in gas supply that will make Australia the world's second-largest exporter before the end of the decade.

Much of the gas pumped out of the ground in Queensland has already been sold to customers in Asia, mainly in Japan, South Korea and China, through long-term contracts starting around 2015. Any delays could send prices for gas in the region much higher as gas developers scramble to fill those contracts.

Projects already underway are likely to be least affected by the growing protest movement, but those still on the drawing board, especially if still in the exploration phase, will likely face much tougher regulation.

Coal-seam gas development is expected to boost gross domestic product by $3 billion per year when it reaches full scale, and employ 18,000 people at its peak.

But the targeted gas resources lie beneath some of Australia's most productive and intensively farmed land, a major part of Queensland's massive agricultural industry that is forecast to contribute $6 billion, or 2.4 per percent of the gross state product, in 2010-11.

WORTH THE RISK?

For Katie Lloyd, whose family runs the Wieambilla cattle feedlot with 5,000 head of cattle near the town of Chinchilla in the Darling Downs, the crux of the issue is the anxiety of not knowing whether the water removed from the coal seams underneath their land will make their wells run dry.

"The groundwater is everything to us, we'd like to make sure that it's going to be here tomorrow and down the track," says Lloyd. A pony-tailed mother of two young children, she wears a bright blue Wieambilla Feedlot work shirt and tan baseball cap.

Her voice rises a pitch with emotion as she talks about the "beautiful" rolling grazing land: "If the science was there, yes I would feel more secure. If we knew our groundwater was secure and safe, then things would feel better."

Lloyd's property has 18 gas wells drilled by Origin Energy and Queensland Gas Company (QGC), a unit of BG Group. The firms have criss-crossed roads over her property and blocked off squares of her grazing land for coals seam gas wells. Each well takes about a hectare of land.

"We need the confidence to go and make those investments and at the moment this is such a big cloud of uncertainty for us because we don't know what is happening. We don't know what these companies are going to do next," Lloyd said.

Many farmers worry that gas developers have not done enough to make sure water supplies are safe, and others are frustrated they have no right to keep gas companies off their land.

In Australia, contrary to Alan Jones' rousing remarks at the Gunnedah rally, landholders own only the surface rights to their land while the government owns the underlying mineral rights, which it can lease out to gas developers.

Gas companies then negotiate land access agreements to come onto farms and usually take up about one hectare per well, excluding land needed for infrastructure like roads.

At its peak, government estimates of water production from all coal-seam gas wells range from 150 gigalitres (GL) to 300 GL a year, equivalent of up to 120,000 Olympic-size swimming pools.

The Queensland government, criticized for being too eager to reap the economic benefits of the industry, believes the impact on groundwater can be managed through monitoring and a "make good" policy, which requires gas firms to replace any water supplies a landowner loses due to coal-seam gas activities.

The government requires gas companies to drill holes to monitor levels of groundwater, and it drills its own monitoring bores so it can cross-check with industry data.

"The coal-seam gas industry would have more monitoring requirements on it than any other industry in Australia at this point in time," said Andrew Brier, who heads up the coal-seam gas enforcement unit at the Queensland Department of Environment and Resource Management, adding that regulators were not influenced by the state's support for the industry.

"There's been no one standing over my shoulder saying, 'take it easy on the companies'," he said, pointing out that his unit has already fined and led prosecutions against some companies for violating regulations.

'AQUIFERS WILL DROP'

Still, there remains uncertainty about the scale of the impact and where it will be felt the hardest.

"Aquifers will drop. There is no two ways about that. That will happen. The question is, is it of a scale and in a location that upsets somebody," says Peter Stone, an ecological expert with Australia's official scientific body, the Commonwealth Scientific and Industrial Research Organization

(CSIRO).

Gas developers say they are very tightly regulated and have to operate under 300 environmental and social conditions, including the "make good" provisions.

"I'm not sure what regulation deficiency they are seeing," said Rick Wilkinson, chief operating officer of the Australian Petroleum Production and Exploration Association, adding that misinformation and fear were fuelling the protests.

"We are learning as an industry to work more closely with agriculture. It has been quite a good, evolving process," he said.

Government and industry reassurances have done little to comfort the Lloyds, who draw water for their cattle from the ground using bores and still worry the gas developers will leave their family business high and dry.

The Lloyds were the first landowners in Queensland to file a complaint asking regulators to investigate a drop in water levels in their bores, but both a Queensland government report and company reports found that the drop was unlikely to have been related to coal-seem gas activity.

The Lloyds have appealed the findings and the government and the companies operating on their property are now monitoring real-time data to find a definitive reason for the water drop.

"It's unlikely (to be due to coal-seam gas), but it's hard to be 100 percent certain, because it's just the nature of groundwater," said Brier, of the coal-seam gas enforcement unit.

The Lloyds remain skeptical.

"There's 165 coal-seam gas wells within about five kilometers and plus there are a lot of workers' camps," Katie Lloyd said. "We've already got an overallocated system, so where does that water come from?"

POLARIZED

Opposition to coal-seam gas captures the headlines, but opinion within affected rural communities is divided. Some farmers support gas development because compensation for the wells can be a boon, especially during dry years.

"It's polarized the community ... I can't think of anything in history that's got people so passionate," said Ree Price, who moved to the area for a job rounding up cattle and then stayed after meeting her husband in the 1980s.

The Prices' property, Mt Hope, where they run a cattle-raising and breeding business, also has around 90 gas wells operated by Santos and QGC. Ree Price says she has managed to co-exist -- and sometimes benefit -- from the gas development.

"What are our options, really? You can dig your toes in, you can make it really difficult, but when it all boils down to it ... we farmers have no control over (it) at all," she said.

The Prices' property is also home to a Santos pilot project, the first of its kind, using treated coal-seam gas water to irrigate crops the Prices can feed to their cattle.

Until a few years ago, the Prices had been hit hard by drought and the land became so dry they had to ship in molasses to feed the cattle because there was no hay.

But with compensation income from the gas companies, they have been able to accomplish their business plan for the next 10 years in just three years, Price said. Because of confidentiality agreement with the company, Price could not disclose the amount of payments she received per well.

Price said part of the reason she and others in the area had been more open to gas exploration is that both oil and gas and cattle-raising had long histories in the area.

Australia's first oil find in 1900 was near Roma, which is also home to Australia's largest cattle market. The country's first commercial oil well was spudded in nearby Moonie.

The oil and gas industry's presence is still very visible: one of the town's tourist attractions is the "Big Rig" museum, which has an old rig that towers next to the main street.

COMPENSATION AND HIGHER COSTS

Farmers are also split on the level of compensation: some like Price are relatively content, others think it is too low and some like Lloyd believe it is besides the point until they are satisfied that gas development is safe for groundwater.

Compensation is negotiated privately between farmers and gas companies and farmers generally sign a confidentiality agreement, but anecdotal evidence suggests payments range from $1,500 to $5,000 per well per year as well as payments for additional infrastructure such as roads.

Another symptom of rapid gas development in rural areas has been a jump in labor costs, as the gas companies compete with farmers for semi-skilled workers.

But new employers have been good news for rural towns eager to provide local jobs and opportunities for their children.

"I've been through too many droughts and bad times in the rural community... there were too many downturns there not to welcome an industry that's given life to all our towns," says Robert Loughnan, mayor of the Maranoa Regional Council in Roma.

"It's really an opportunity for our kids," said Loughnan, who has sons aged 10 and 11 whom he doesn't expect to follow him into farming.

COAL SEAM GAS: WHAT'S THE RUSH?

Ultimately, the rush to push ahead with gas developments so rapidly may be the very thing that slows them down.

The number of wells has increased exponentially in just the last few years. Nearly 4,500 wells had been drilled as of September this year and that number is expected to jump almost tenfold to 40,000 when the industry reaches peak production, according to official data and estimates.

Wayne Newton, an irrigation farmer just south of the town of Dalby, is not an outright opponent of coal-seam gas drilling but wonders why it all needs to happen so fast.

"We sit on some of the best food-producing land in the world, we feel, and we really don't want to put that at risk," Newton said. "We think if things would be done just a little more slowly, we'd be able to overcome most of the issues."

(Editing by Mark Bendeich and Simon Webb)

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